Weekly Law Resume - June 6, 2013: Insurance Coverage – Insurance Code Section 533(b) and Defense of Criminal Complaints

by Low, Ball & Lynch
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Mt. Hawley Insurance Company v. Richard R. Lopez, Jr.
Court of Appeal, Second District (May 1, 2013)

Insurance Code Section 533 provides that an insurer is not liable for willful acts of an insured, and thus is not required to indemnify its insured for criminal actions if the insured is found guilty of the same. Insurance Code Section 533.5(b) likewise limits the liability of an insurer for defense costs to certain criminal prosecutions or criminal based actions. This case considered the scope of Section 533.5(b)’s prohibition of an insurer’s payment of defense fees in various actions.

On January 6, 2010, the United States Attorney for the Central District of California filed a grand jury indictment charging Dr. Richard Lopez (“Lopez”) with criminal conspiracy, false statements and concealment, and falsification of records. The indictment alleged that Lopez, who was the medical director of the St. Vincent’s Medical Center Comprehensive Liver Disease Center (“St. Vincent’s”), conspired with another doctor and other hospital employees in the liver transplant program to transplant a liver into the wrong patient. According to the indictment, Lopez diverted a liver designated for one patient to a different patient who was further down the list of patients waiting for a liver transplant, in violation of regulations promulgated by the United States Department of Health and Human Services under the National Organ Transplant Act, and then covered up his diversion.

Daughters of Charity Health Systems, Inc. (“DCHS”), which owned St. Vincent’s, purchased an executive liability policy pursuant to which Mt. Hawley agreed to “pay on behalf of the Insureds, Loss which the Insureds are legally obligated to pay as a result of Claims . . . against the Insured for Wrongful Acts . . . .” An endorsement defined “claim” to include “a criminal proceeding against any Insured commenced by the return of an indictment” or “a formal civil, criminal, administrative or regulatory investigation against any Insured . . . .” There was no dispute that Lopez fit the definition of “an insured” under the policy. Lopez tendered defense to Mt. Hawley, which declined to defend or indemnify Lopez, and filed a declaratory relief action. Mt. Hawley brought a motion for summary judgment, based on, among other things, its argument that it had no duty to defend Lopez against the grand jury indictment because any defense obligation was excluded under Insurance Code Section 533.5(b). The trial court agreed, and granted the motion for summary judgment. Lopez appealed.

The Court of Appeal reversed. The Court held that the language, while forbidding any defense obligation for certain kinds of criminal or administrative proceedings, did not forbid defense of all possible proceedings, and did not forbid defense of any claims by United States Attorney. Specifically, Section 533.5(b) stated, in relevant part, “No policy of insurance shall provide, or be construed to provide, any duty to defend, as defined in subdivision (c), any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to” the UCL or the FAL “in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor, or any county counsel, notwithstanding whether the exclusion or exception regarding the duty to defend this type of claim is expressly stated in the policy.”

According to the Court of Appeal, this language was ambiguous, and could be construed several ways, all of which were reasonable interpretations. First, as Mt. Hawley argued, the language could be read to preclude recovery of defense in any criminal action, no matter who brought it. Secondly, it could be that any criminal action brought by the specifically stated prosecutors was barred (but not criminal actions of federal prosecutors), and thirdly, it could be a bar to any criminal or civil action by any of the specifically stated prosecutors (but not criminal or civil actions of federal prosecutors).

The Court of Appeal noted that rules of construction require that when there is more than one reasonable interpretation of the language, statutory history should be looked at to help guide the interpretation of the language. Here, Section 533(b) had been enacted because public entities were having a difficult time bringing Unfair Claims Law (“UCL”) or False Advertising Law (“FAL”) claims because defendants in many such actions were obtaining defense for such claims under their insurance policies. Section 533.5(b) was enacted to combat this. Later, when regulatory agencies were bringing toxic cleanup actions, the Section was being quoted to deny coverage, so the Section was again amended to allow defense of those types of actions. Armed with this kind of legislative history, the Court of Appeals noted that there was nothing in that history to forbid defense of criminal or civil actions by federal prosecutors.

The Court stated that aside from the legislative history analysis, this interpretation also made common sense. The Court noted that outside of the special area of UCL and FAL actions brought by state and local prosecutors, there was no public policy in California against insurers contracting to provide a defense to in insured facing such criminal charges, as opposed to indemnifying them for those convicted of criminal charges. To the contrary, courts have held that section 533, which prohibits indemnification for losses caused by the willful act of the insured, does not extinguish the insurer’s duty to defend an insured accused but not convicted of those willful actions. Consequently, it made sense that outside the specific prohibitions against providing a defense as outlined in Section 533.5(b), a carrier would otherwise have a duty to defend such a claim (particularly where, as here, the policy included “criminal proceeding” in the definition of a claim).

The Court of Appeal reversed the granting of summary judgment in Mt. Hawley’s favor, since it found a duty to defend the claims brought against Lopez by the federal prosecutor.

COMMENT

While carriers will not have a duty to indemnify insureds for willful acts, and will have limited responsibility to defend against certain types of criminal actions or actions based on UCL or FAL claims, this case made it clear that the prohibition on the duty to defend is limited to those claims by those prosecutors enumerated. Insureds remain entitled to defense against many federal indictments.

For a copy of the complete decision see:

http://appellatecases.courtinfo.ca.gov/search/case/mainCaseScreen.cfm?dist=2&doc_id=1984209&doc_no=B234082

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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